TRUSTS Flashcards
LIVING TRUST
A living trust is a legal document, or trust, created during an individual’s lifetime (the trustor or grantor) where a designated person, the trustee, is given responsibility for managing that individual’s assets for the benefit of the eventual beneficiary.
The purpose of a living trust is to hold your assets while you’re alive and distribute them according to your wishes at your death.
Irrevocable life insurance trust
Grantor-retained annuity trust (GRAT), spousal lifetime access trust (SLAT), and qualified personal residence trust (QPRT) (all types of lifetime gifting trusts)
Charitable remainder trust and charitable lead trust (both forms of charitable trusts)
What is the downside of a living trust?
No Asset Protection – A revocable living trust does not protect assets from the reach of creditors. Administrative Work is Needed – It takes time and effort to re-title all your assets from individual ownership over to a trust. All assets that are not formally transferred to the trust will have to go through probate.
REVOCABLE LIVING TRUST
As its name indicates, the revocable living trust is one that you can revoke, or cancel, at any time. However, the term “revocable” includes more than just the ability to terminate the trust. The revocable living trust lets you retain control over your assets even though it’s the trust that owns them.
As the grantor of a revocable living trust, you can:
Modify any of the trust terms
Transfer assets in and out of the trust
Change your beneficiary or beneficiaries, trustee, and successor trustee
Additionally, many people designate themselves the trustee when they’re setting up a revocable living trust. Other advantages of a revocable living trust include the following:
Avoiding probate. Because the trust owns the assets contained in the trust, these assets aren’t subject to the probate process on your death.
Maximizing privacy. Assets going through the probate process are a matter of public record. By keeping your assets within the trust, you retain privacy over those assets and their manner of distribution.
Your incapacitation. With a living trust, you can designate someone to step in if you become incapacitated, either mentally or physically, and can no longer manage the trust.
IRREVOCABLE LIVING TRUST
The irrevocable living trust also functions as its name indicates. It’s irrevocable, so once you’ve set up an irrevocable living trust, you give up the ability to do anything with it. Not only can you not terminate or cancel it, but you also can’t make any changes to the trust.
Given its lack of flexibility, the irrevocable living trust isn’t as popular within the estate planning process. Its irrevocability is its main disadvantage: once you transfer assets to the trust, you no longer control those assets.
There are, however, certain circumstances where an irrevocable trust might make sense, including the following situations:
Minimization of estate taxes. Certain types of irrevocable trusts can help you to reduce or eliminate estate taxes. The rules for these trusts can be complex, so it’s always a good idea to consult with an attorney if your goal for your irrevocable living trust is to minimize estate taxes.
Medicaid eligibility. A government program such as Medicaid often includes specific thresholds that determine eligibility for the aid in question. By making your trust irrevocable, your beneficiaries are less likely to have their income or asset eligibility levels affected by the trust.
Creditor protection. Because it can’t be terminated once it’s set up, the irrevocable trust offers more creditor protection to both the settlor of the trust and the trust’s beneficiaries than a trust that’s revocable. If creditor protection is one of your objectives, then you may want to consider an irrevocable trust.
TESTAMENTARY TRUST
A testamentary trust is a trust that is established in accordance with the instructions contained in a last will and testament.
A testamentary trust is created to manage the assets of the deceased on behalf of the beneficiaries. It is also used to reduce estate tax liabilities and ensure professional management of the assets of the deceased.
KEY TAKEAWAYS
A testamentary trust is a trust that is to contain a portion or all of a decedent’s assets outlined within a person’s last will and testament.
A testamentary trust is not established until after the person passes away in which the executor settles the estate as outlined in the will.
A testamentary trust can name minors as beneficiaries, in which the deceased’s assets are paid out only when they reach a certain age.
The trust can also be used to reduce estate tax liabilities and ensure professional management of the assets.
A disadvantage of a testamentary trust is that it does not avoid probate—the legal process of distributing assets through the court.
TRUST
A trust is a fiduciary relationship that allows a trustee, who is a third party, to manage assets on behalf of the beneficiaries of the trust.
LAST WILL AND TESTAMENT
A last will and testament is a legal document that communicates a person’s final wishes pertaining to assets and dependents. A person’s last will and testament outlines what to do with possessions, whether the deceased will leave them to another person, a group or donate them to charity, and what happens to other things that they are responsible for, such as custody of dependents and management of accounts and financial interests.
KEY TAKEAWAYS
If parents with children die without a last will and testament, the courts will appoint a guardian for their minors.
If you die intestate, your estate is settled by the courts, including the distribution of all assets.
Writing a will and testament gives you some control over what happens to your assets after your death.
Trusts and life insurance policies with named beneficiaries do not pass through probate court.
TRUST VS WILLS
- Names Guardianship of Minor Children Trust ~ No Wills ~ Yes - Can be Challenged in Court Trust ~ Not usually Wills ~ Yes - Probate Court Trust ~ No Wills ~ Yes - Rules Around Inheritance Trusts ~ Yes Wills ~ No - Active upon Signing Trusts ~ Yes Wills ~ No - Can be Revised Trust ~ Yes, if it is a revocable trust Wills ~ Yes - Private or Public Record Trusts ~ Private Wills ~ Public record
